Flashcards in FAR 34 - Stock Comp (Share-Based Payments) Deck (13):
Under the fair-value method of accounting for stock option plans, total compensation recognized
A. Is based on the value of the option at the grant date, adjusted for forfeitures.
B. Equals the net increase in OE after all relevant journal entries are recorded.
C. Is the difference between market price and option price at the grant date.
D. Is unaffected by the option price.
A. The fair value of the option sets the compensation expense to be recognized for each option expected to be vested. Applying the forfeiture rate ensures that only options expected to be vested will be entered into the calculation.
The stockholders of Meadow Corp. approved a stock-option plan that grants the company's top three executives options to purchase a maximum of 1,000 shares each of Meadow's $2 par common stock for $19 per share. The options were granted on January 1 when the fair value of the stock was $20 per share. Meadow determined that the fair value of the compensation is $300,000 and the vesting period is three years. What amount of compensation expense from the options should Meadow record in the year the options were granted?
The fair value of a fixed option plan at grant date is the fair value of the option. Typically the fair value of one option is given and that is multiplied by the number of options, but this problem provides the entire fair value. That total fair value is the total compensation expense to be recognized over the service period - the number of years from grant date to vesting. Once the options vest, no more compensation expense is recognized because the manager has provided the necessary service. Compensation expense per year is the total $300,000 compensation expense divided by 3 years, or $100,000 per year.
In a stock option plan, the estimated forfeitures rate is increased during the second year of a four-year service period. Therefore,
A. the remaining amount of expense based on the new estimate is allocated to years two-four.
B. the new estimate is retroactively applied.
C. Compensation expense for year two causes total recognized compensation expense through year two to be half of total compensation expense using the new estimate.
D. The effect of the change causes a reversal of previously recognized compensation expense.
C. The new estimate is used to compute compensation expense on prior years and the year of change. The resulting total amount of expense through the year of change, less the expense already recognized, is the amount of expense recognized in the year of change.
The new estimate continues to be applied in later years.
A stock option plan with a positive fair value at grant date caused compensation expense of $50,000 per year to be recorded over the five-year service period. During the exercise period (two years), the stock price never exceeded the option price. Therefore, none of the options was exercised.
Choose the correct statement about the accounting for these options.
A. the contributed capital increase from recording compensation expense is reversed, causing compensation expense to be reduced in the eighth year after grant.
B. The contributed capital increase from recording compensation expense is left intact.
C. The financial statements during the service period are retroactively restated by removing the compensation expense.
D. The compensation expense for later option grants is reduced by the amount recognized on the options that expired.
B. Expiration of stock options does not cause reversal of compensation expense because, at the grant date, the firm did provide value to the employee, given that the option had a fair value at that time.
The expense recognized for stock option plans is not based on the expected value of the employee services; rather, it is based on the value of what was given by the employer to the employee.
On which of the following dates is a public entity required to measure the cost of employee services in exchange for an award of equity interests, based on the fair market value of the award?
A. Date of grant.
B. Date of restriction lapse.
C. Date of vesting.
D. Date of exercise.
A. The fair value on the grant date is used for measuring compensation expense, because, on that date, the employer has given a resource of value to the employee.
T/F: The total compensation expense for a stock option plan must reflect an estimate of forfeitures if probable and estimable.
T/F: A stock option plan with an exercise price of $4 is granted when the market price of the stock was $3. Therefore, the compensation expense to be recognized over the service period is $1 per share under option.
A restricted stock award was granted at the beginning of 2005 calling for 3,000 shares of stock to be awarded to executives at the beginning of 2009. The fair value of one option was $20 at grant date. During 2007, 100 shares were forfeited because an executive left the firm.
What amount of compensation expense is recognized for 2007?
Total compensation expense at grant date is $60,000 (3,000 x $20). The service period is four years ($20x5 - $20x8). Annual expense recognized is $15,000 ($60,000/4).
Through $20x6, a total of $30,000 of compensation expense is recognized. After the forfeit, only 2,900 shares remain to be awarded.
Annual compensation expense for the remaining two years before considering forfeited shares is therefore $14,500 [(2,900 x $20)/4].
The expense for the two years associated with the 100 shares forfeited is $1,000 [(100 x $20)/2].
For $20x7, subtracting the reversal of the $1,000 yields $13,500 as the final amount of expense to be recognized.
T/F: When an employee forfeits a restricted stock award, compensation expense in the period of forfeiture is credited for the amount of expense recognized on the award in previous periods.
On January 2, 2005, Morey Corp. granted Dean, its president, 20,000 stock appreciation rights for past services. Those rights are exercisable immediately and expire on January 1, 2008.
On exercise, Dean is entitled to receive cash for the excess of the stock's market price on the exercise date over the market price on the grant date. Dean did not exercise any of the rights during 2005. The market price of Morey's stock was $30 on January 2, 2005 and $45 on December 31, 2005.
As a result of the stock appreciation rights, Morey should recognize compensation expense for 2005 of
The 2005 compensation expense for these stock-appreciation rights equals: (number of shares) x (ending market price - grant-date market price) = 20,000($45 - $30) = $300,000.
The rights are immediately vested, because they can be exercised immediately. Therefore, the entire $300,000 amount is recognized as expense in 2005. Changes in market price in future years, before the rights are exercised, are recognized on a current and prospective basis (change in estimate).
Select the correct statement about executive compensation plans involving stock.
A. The total amount of compensation expense for a restricted stock award plan is recognized when the stock is issued.
B. The total amount of compensation expense for a restricted stock award plan is determined at the grant date.
C. For stock-appreciation rights plans payable in cash, compensation expense is recognized only during the service period.
D. For stock-appreciation rights plans payable in cash, compensation expense recognized in any given reporting period cannot be negative.
B. Total compensation expense is the product of the number of shares in the award and the market price of stock at the grant date. This amount is recognized over the service period required for the employee to receive or keep the shares.
T/F: The total compensation expense for a stock appreciation rights plan is set at the grant date.
Compensation expense is recorded each year based on the FV at the end of the period for the portion of the service period elapsed using the catch up procedure for stock options.